South Africa’s top-performing equity fund has reaped the benefit of a wager that battered stocks, particularly in the energy sector, would flourish as economies rebounded from the worst of the pandemic.
Blue Quadrant Capital Management’s Worldwide Flexible Prescient Fund has returned 125% this year, the most of any South African fund of at least R100 million, and more than double its nearest rival. Additions made while Covid-19 ravaged markets in the first quarter of 2020 have proved key, said Leandro Gastaldi, who runs the R120 million portfolio.
“We expected recovery and it’s largely a function of the recovery from the Covid pandemic and the effect of that on the energy sector,” he said.
Energy accounts for 45% of the fund’s assets, reflecting a stance maintained for four years, Gastaldi said in an interview from Cape Town. Blue Quadrant has long been positive on oil and gas, arguing that a period of lower prices had caused underinvestment. The wager paid off as the pandemic further discouraged spending on capacity, creating conditions for a supply crunch and price surge as economies reopened.
|Gastaldi’s biggest holdings as of Sept. 30|
|Cenovus Energy Inc.|
|Occidental Petroleum Corp|
|Antero Resources Corp|
|Suncor Energy Inc.|
|Thungela Resources Ltd.|
While foreign stocks account for much of the fund’s energy allocation, Gastaldi has also added South African equities to take advantage of hammered valuations, with domestic small- and medium-sized companies now 30% of the portfolio.
“The valuations in many companies were probably as depressed as we’d ever seen it,” he said. “That created an opportunity to increase one’s exposure to South Africa.”
Fertilizer and explosives maker Omnia Holdings and woodfiber and paper producer Sappi are among stocks bought, along with coal miner Thungela Resources — the year’s third-best performer in Johannesburg — and Harmony Gold Mining. Another is Royal Bafokeng Platinum, up almost 80% this year and now in talks to be acquired by bigger rival Impala Platinum Holdings.
There are still opportunities in South Africa, though the local market’s 80% recovery from its March 2020 pandemic-induced low places a premium on stock selection and creates a preference for companies with foreign-based earnings and resilience to the country’s frequent rolling blackouts and rising power prices, Gastaldi said.
“It’s in companies that we think can benefit from a weaker rand, and have the ability to navigate the domestic challenges, particularly the electricity challenge.”
And that bet on energy stocks will remain in place.
Gastaldi sees oil climbing beyond $100 a barrel. But even if it doesn’t, oil companies can be an attractive proposition.
“We see them generating a lot of free cash flow and we see them using this to pay dividends or do share buybacks, which ultimately, will still create upside returns, even if the oil price just stays where it is.”